The Different Types of Ownership

There are three types of ownership which reprints how your restaurant can be classified as. If you do nothing, and simply open a business and start working right away, these will generally be classified as a sole proprietorship, which is estimated to compromise

Sole Proprietorships one person owning and operating a business (Advantages: ease of start/ending business, own boss, less regulation / Disadvantages: unlimited liability, limited financial resources)

Benefits of Being a Sole Proprietor

The benefit is you are individually responsible for everything, so you decide the marketing budget, the menu, who to hire and fire, where the locations should open, etc. A highly profitable business means you reap most of the benefits and do not have to share your earnings with a franchise company, a board of directors, or partners.

The obvious drawback to this is, since it is only you (or in many cases a family business, which is still classified under sole proprietor in most cases), you are also fully responsible for all taxes, legal liabilities, and employment related issues. Make sure to save enough money to pay a huge tax windfall you will owe at the end of each year for social security, state and federal taxes, and premiums on workers’ compensation insurance.
Partnerships are legal business with two or more parties. What I see in my personal experience is that in partnerships it’s usually classified as a partnership for one of three reasons:

1) The business is started by siblings (two brothers, two sisters…etc). These kinds of businesses start positive, but due to the high volume of stress restaurants or any other food or bar business typically bring upon its owners family relationships tend to suffer. think twice before opening a business with your siblings. In some cases it works beautifully, but more often than not, tragically, it ends with huge legal fights and breaks up families.

2) Some partnerships are made of people that come from totally different backgrounds. For example in our catering business chapter (Let Them Eat Cake), we saw how this can work. If you are great at marketing but terrible at cooking, you would need a chef to partner with. In some cases this can work beautifully, but beware partnering with n eddy people that want to use you just to get their feet in the door but don’t want to do an equal amount of work.

3) Partnerships are often formed in businesses where it is really tough to do anything alone, for example law firms and medical practices. Often you have dentists that are married and share an office, or similar family situations. Many of these “form a partnership for the convenience of it” types open up partnerships as a married couple.

Just as the previous examples, be very careful about this. Marriage is difficult enough as it is without mixing the stresses of work into the equation. It can work, but requires tons of care and effort.

(Advantages: shared financial resources, equal and divided risks, no special or added taxes / Disadvantages: unlimited liability, profits are equally shared, disagreements due to emotional stress and potential conflict of interest)

Corporations are legal entities with their own social security number. Often they are treated like citizens by the government; they are taxed, they are considered a separate entity, and they can even be convicted of crimes and fined just like an individual.

The advantages are that they have a limited liability, usually gain more money to invest from huge investors, they recruit talented employees, and corporations usually (though not always) outlive their founders by many decades. Longevity is much easier for established corporations than sole proprietorships.

Disadvantages: double taxation, usually expensive to incorporate with tons of required paperwork both with the government and the IRS, and sometimes they get too big to make quick decisions, falling prey to newer businesses with quick thinking. That is to say, they are slow to change (thinkMc Donald’s and how it’s been losing money for years now without being able to change the quality or the perception of their low quality as a brand).

Resources used for this blog:

1) http://www.foodservicewarehouse.com/education/how-to-start-a-restaurant/restaurants-organized-as-sole-proprietorships/c28278.aspx

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